De-Colonizing Development: Knowledge & Technology Transfer To Benefit Indian Ocean Communities – II

By Darini Rajasingham-Senanayake –APRIL 5, 2019

Dr. Darini Rajasingham-Senanayake

Paradox of Plenty or Marine Resource Curse? Turning Lanka’s Debt-Trap Narrative on its head

Ceylon/Sri Lanka’s geostrategic location was the reason that the island was colonized by competing European (Portuguese, Dutch and British) maritime empires seeking to control the Sea Silk Route and trade in the Indian Ocean for 450 years; from 1505 CE until independence in 1948. Today Sri Lanka is a “chock point” in international security discourse for energy, trade and data transmission for the global internet’s Undersea Data Cable Routes (UDC).

Given its geo-politically strategic location in the Indian Ocean which is a hot spot in the emergent Cold War between the US and its allies and China with the ambitious Belt and Road (BRI) project, and the wealth of Lanka’s ocean resources, both living and non, living, the country which is in a ‘debt trap’ to international bond traders who own 55 percent of Sri Lanka’s sovereign debt that has caused rapid currency depreciation appears to suffer from a classic case of what some development economists term a Paradox of Plenty or ‘Resource Curse”.

The resource curse refers to countries with an abundance of natural resources (such as fossil fuelsand certain minerals), that tend to have less economic growth, less democracy, poor governance, high rates of corruption and worse development outcomes than countries with fewer natural resources. There are many theories and much academic debate about the reasons for, and exceptions to, these adverse outcomes. Certain types of countries or regions, such as those in or recovering from armed conflicts are particularly susceptible to the resource curse, given debilitated governance institutions and brain drain of expertise and talent, and a concomitant dependence on foreign aid, experts and consultants to craft development policy.

The idea that resources and geostrategic location might be an economic curse than a blessing emerged in debates in the 1950s and 1960s about the economic problems of low and middle-income countries, as Cold War proxy wars ravaged Africa, the continent with the richest mineral resources and raw materials in the world. Subsequently, former head of the Reserve Bank of India Raghuram G. Rajan and Arvind Subramanian, argued in a widely read paper that; “one of the most important and intriguing puzzles in economics is, why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies” (2006). They suggested that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of labor intensive and exporting industries, as well as, a lower growth rate of the manufacturing sector as a whole. They provided evidence suggesting that the channel for these effects is a real exchange rate overvaluation caused by aid inflow.

That Sri Lanka has attracted little Foreign Direct Investment (FDI), but is a “donor darling” with numerous debt-trap “development” projects that lack transparency and accountability, substantiates our ‘resource curse’ hypothesis to explain the county’s post-war debt trap.  35% of Sri Lanka’s sovereign debt is owed to Japan’s JICA, ADB, and the World Bank for concessionary loans. China, which holds about 14% of Sri Lanka’s sovereign debt according to Verite Research has been targeted by American Vice President, Mike Pence, on several occasions for blame for Sri Lanka’s post-war debt trap “development” trajectory – signaling the extent of on-going trade and Cold War tensions between US and China in the Indian Ocean. Meanwhile, the shadowy Millennium Challenge Corporation  (MCC), which had promised a billion dollar “Aid Compact” back in 2016 for yet unspecified projects, drafts Sri Lankan Prime Minister, Ranil Wickramasinghe’s, land, transport and energy sector policies. Although many multilateral and bilateral concessionary loans come with significantly lower interest rates than from the private sector, because they are still denominated in foreign currencies such as dollars, payments on them can also become substantially more expensive if a country’s currency devalues. Sri Lanka’s total foreign debt burden had increased by over Rs 626 billion due to the depreciation of the rupee against the US dollar between January 2015 and November 2017, Parliament was told on March 26, by State Minister of Finance Eran Wickramaratne.

Read More